If you wish to achieve financial freedom by the time you retire, you should know what is going to be the future value of money that you are saving today. I am not sure if you know that the actual inflation is more than what the CPI (Consumer Price Index) based inflation statistics is published by newspapers. But the real inflation over the last 100 years tells a different story.

Indian media talk about GDP growth. They often overlook the fact that with a population of 1.25 billion, we should look at our per capita GDP than our overall GDP. Unfortunately, India's GDP growth per capita has remained flat over the last century, while other major economies have shown much faster growth in their 'GDP per capita', refer the graph above, source courtesy Wikimedia Commons statistics.

How inflation over last decades affected the purchasing power of people

In the year 1920, a family of four could manage their expenses comfortably with an income of Re 1 per month. Those were arguably, the good old days of our grandparents.

In 1940, a similar family could have the same standard of living, with a take-home salary of Rs. 10 per month. A 10 times reduction of purchasing power.

Come 1960, for the same living standard, a family needed Rs. 100 as monthly income..

1980 – The baby boomers in India needed Rs 1000 per month to run a family well.

Enter the year 2000 – The take-home income needed to be was Rs. 10,000 per month for the same middle-class family. Throughout this period, we had different Governments and economists at the helm of policy and financial affairs. All of them tried to check inflation with their best efforts. But the inflation rate over the last 100 years seems to have remained too difficult to control. Obviously, by 2020, an average family is going to need an income of Rs. 100,000 per month to maintain their standard of living that the same person managed with Rs. 10,000 in the year 2000.

Sitting in 2017 you might think one hundred thousand rupees would be a lot, but such underestimation of inflation has been there among people over the last 100 years!.

The Compounded Annual Growth Rate (CAGR) of Inflation Over the Last 100 Years.

This is just to give you an idea about the difference between what the statistics of CPI (Consumer Price Inflation) you see on the TV and other media, while the reality is different. If we take the starting value at Re 1.00 in 1920 and take the end value at Rs. 100,000.00 in 2020, the CAGR can be calculated using the formula as:. CAGR =((End Value/Start Value)^(1/Periods) -1. Converting it into percentage works out to 12%. This is the real inflation rate that we need to prepare for. To know more about working out CAGR, Click Here..

Why is it so important to know the actual inflation in order to plan your Financial Independence?

The trend shows that if you invest your money today at any financial instrument that yields a minimum return of 12% compounded gain, then only at the end of the maturity period you will get back a sum that will have a similar purchasing power of the amount at the starting of the investment. Question is, “Which investment can ensure such return?" There are very few, and those involve taking a fair amount of risk that is not under your control. But there are ways when you can take charge of your financial growth.. I shall discuss that in my next post..